ELEMENTS OF COMPETITIVE ANALYSIS
Competitive analysis is the practice of analyzing the competitive environment in which your business operates (or wishes to operate), including strengths and weaknesses of the business with which you compete, strengths and weaknesses of your own company, demographics and desires of marketplace customers, strategies that can improve your position in the marketplace, impediments that prevent you from entering new markets, and barriers that you can erect to prevent others from eroding your own place in the market.
Competitive analysis has long been a cornerstone of overall competitive strategy for multinational conglomerates and “mom and pop” stores alike. Moreover, business experts note that competitive analysis transcends industry areas; indeed, the practice is deeply relevant to all industries.
Despite this, however, business experts say that while established businesses commonly practice competitive analysis on a regular basis, new businesses too often are derelict in this area. Every business has competition; those currently operating a company are all too aware of the many competitors for a customers’ dollar. But many people new to business – excited about their concept and motivated by a perceived opening in the market – tend to underestimate the actual extent of competition and fail to properly assess the impact of that competition on their business.
Elements of Competitive Analysis
There are several important elements of competitive analysis, each of which need to be carefully studied if one hopes to transform competitive analysis activities into business profitability. Major aspects of competitive analysis include the following:
The first step in competitive analysis is to define your universe of competitors. Some businesses may offer products or services that largely mirror those offered by your own company, while others may only dispense one or two products/services that compete with your company’s offerings. The business conducting a competitive analysis has to decide whether latter examples of competition are incidental or whether they present a potential threat (either now or in the future) to the business’s financial wellbeing. Consultants and business experts also recommend that small business owners scan the horizon for potential as well as current competitors.
Analysis of Competitor Strengths and Weaknesses
Once a company’s universe of competitors has been defined and identified, it can start on the process of identifying the strengths and weaknesses of those competitors. Many small business owners are tempted to place undue weight on the quality of the product or service they offer (or plan to offer, in the case of new businesses); this may be comforting though, but it betrays a fundamental misunderstanding of how business works. The objective features of your product or service may be a relatively small part of the competitive picture. In fact, all the components of a customer preference, including price, service, and location, are only half of the competitive analysis.
The other half of the equation is examining the internal strength of your competitors’ companies. In the long run, companies with significant financial resources, highly motivated or creative personnel, and other operational assets will prove to be tough, enduring competition.
There are two main questions that cut to the heart of this element of competitive analysis: what key advantages do the competing businesses possess in the realms of production management, marketing, service reputation, and other aspects of business operation? What key vulnerabilities or weaknesses do the competing firms have in these same areas?
Of course, examination of a competitor’s strengths and weaknesses also require separating important advantages (intense customer loyalty, for instance) and disadvantages (reputation as a polluter) from less important advantages (a larger packing lot, perhaps) and disadvantages (older forklift machinery). Business owners should concentrate their analysis efforts in four major areas:
• Studying the reasons behind the success and failures of competitive firms
• Major issues that motivate customers
• Major component costs
• Barriers to mobility within the industry
Analysis of Internal Strengths and Weaknesses
Another important element of competitive analysis is determining what your own company’s strengths and weaknesses are. What aspects of the company’s operation convey an advantage in the market place? Is your sales force composed of bright, ambitious individuals? Does your company have an advanced inventory management system in place? Do you have an employee with a talent for advertising and/ or marketing? Once a company has determined its strengths, it can go about the process of utilizing those strengths to improve its position in the marketplace.
Conversely, an examination of internal weaknesses (uninspired product presentation, recalcitrant workforce, bad physical location, etc.) should spur initiatives designed to address those shortcomings.
Analysis of Customer Needs and Wants
Learning about customer needs and wants is an important part of competitive analysis as well. Customer priorities should become your business’s priorities. In addition, small businesses should take care that they not limit their study to priorities that are already manifested in the marketplace. Indeed, new product development and new innovations in service are essential to business success in any industry. Because owners and managers need to study – and thus anticipate – future customer needs and wants as well as those needs and wants that are currently being addressed.
Studying Impediments To Market For You And Your Competitor
Businesses seeking to enter new markets typically have to grapple with several different barriers. Some of these can be surmounted without inordinate difficulty, while others may be so imposing that they preclude launching a campaign. Several common barriers to entry for new competition are cited below:
• Patents – These provide some protection for new products or processes
• High startup costs – In many cases, this barrier is the most daunting one for small businesses
• Knowledge – Lack of technical , manufacturing, marketing, or engineering expertise can all be a significant obstacle to success market entry
• Market saturation – It is a basic reality that it is more difficult to carve out a niche in a crowded market that it is to establish a presence in a market by relatively light competition.
Realistically, few barriers to entry last very long, particularly in new industries. Even patents don’t provide nearly as much protection as is generally assumed. Thus you need to realistically project the period of time by which new competitors will breach these barriers.
Building Strategic Plans to Improve Marketplace Position
Once a business owner has attended to the above requirements of competitive analysis, he or she can proceed with the final element of the practice: building a strategic plan that reflects the findings. Strategic plans should touch on all areas of a business’s operations, including production of goods and/or services, distribution of those goods and /or services, pricing of goods and/or services, and marketing of goods and/or service
If you find this article useful, please share and subscribe to our newsletter.